Thursday, September 01, 2011

Monetary Relief Against Diet Product Marketers Sued by FTC Upheld

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A permanent injunction and nearly $2 million monetary judgment entered against the marketers of two purported weight loss products—a "Chinese Diet Tea" and the "Bio-Slim Patch"—for engaging in deceptive advertising prohibited by the FTC Act were proper, the U.S. Court of Appeals in New York City has ruled.

The federal district court in Bridgeport, Connecticut, did not exceed its authority in awarding monetary relief, and it committed no error in calculating the award or ordering the marketers to disgorge the full proceeds from their sale of the products, the appellate court said. The judgment of the lower court (2009-2 Trade Cases ¶76,840) was affirmed.

Authority to Grant Monetary Relief

The statute on which the district court’s jurisdiction was based—Sec. 13(b) of the FTC Act—empowered the court to award ancillary equitable remedies, including equitable monetary relief such as disgorgement of wrongfully obtained funds, in the appellate court’s view.

That the marketers’ funds were wrongfully obtained was not in question, as the marketers had conceded liability with respect to the marketing of both products. There was no evidence that any of the marketers’ gains were "just" gains because the products in no instance worked as advertised, the court noted.

By authorizing courts to issue injunctive relief, Sec. 13(b) invoked the equitable jurisdiction of the court. A money judgment was thus permitted as a form of ancillary relief because, once its equitable jurisdiction had been invoked, the court had "the power to decide all relevant matters in dispute and to award complete relief."

An argument that the express provision of FTC Act Sec. 19 for monetary damage limited Sec. 13(b) to its explicit terms was rejected. The statute made clear that nothing within Sec. 19 affected the authority of the FTC under any other provision of law, the court observed.

Calculation of Relief

The marketers were not entitled to a reduction of the monetary award on account of bounced checks, credit card chargebacks, or other expenses. Their incomplete records did not allow them to calculate the losses from bounced checks and chargebacks that could be attributed to the two products at issue, only the losses across their entire line of products, which numbered more than 60.

The district court’s refusal to apply a loss estimate equal to the two products’ share of the marketers overall share was within its discretion, in the appellate court’s view.

The district court’s monetary award was not an impermissible legal—rather than equitable—award, the appellate court also held. The lower court’s failure to identify particular funds in the defendants’ hands that were specifically traceable to the fraudulently marketed products did not force the court "to conform its award to the ancient remedy of constructive trust" or limit its judgment to the profits generated by the two products at issue.

Where the basis of a claim was a violation of the FTC Act, the court had to determine only that the nature of the underlying remedies sought was historically equitable.

The substance of the monetary judgment comported with the equitable remedy of disgorgement, the appellate court concluded. Disgorgement did not require a district court to apply equitable tracing rules to identify specific funds subject to return.

The decision is Federal Trade Commission v. Bronson Partners, LLC, 2011-2 Trade Cases ¶77,574.

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